Fidelity Simplicity RMD Funds - Allocation Strategy with RMD Age (70.5) in Mind

bee

As you get older and your RMD withdrawal rate increases, the equity allocation in your Simplicity RMD Fund (FIRPX, FIRRX, FIRUX, FIRWX) is designed to decrease and the fund will become more conservative until it reaches an allocation similar to that of the Simplicity RMD Income Fund (FIRNX).

https://fidelity.com/mutual-funds/mutual-fund-spotlights/rmd-funds

My Take:
Downside risk was substantial during 2007-2009 time frame for these funds compared to a fund like VWINX, though they all are performing better than VWINX YTD.

msf

I wouldn't read too much into their history. Per the prospectus:

Prior to June 1, 2017, the fund[s] operated under certain different investment policies and a different pricing structure. The fund's historical performance prior to June 1, 2017 may not represent its current investment policies and does not reflect the fund's current pricing structure.

bee

Also, @msf, I wonder if any investors would place their entire portfolio into a single fund, even one as diversified as these Simplicity RMD Fund offerings?
(FIRWX is a fund of "26" funds)?

Mark

Why should or does ones RMD withdrawal rate increase as they get older?

msf

Not for one's entire portfolio, but for all of one's traditional IRAs (i.e. the part subject to the Table III RMDs).

Traditional target date funds are designed to be held as one's only investment. The idea is that you're leaving the asset allocation to someone else. If you're throwing other stuff into the mix, then you're messing with that allocation. If that's what you want to do, then why use a target date fund?

In contrast, an RMD fund can be mixed in with other funds and still be made to work.

For simplicity, say you've got two traditional IRAs. You use an RMD fund for 100% of one IRA, and take the RMD amount for that IRA out of the RMD fund. You do whatever you want with the other IRA, and take the RMD amount for that second IRA strictly out of that second IRA. This still works, since each IRA is completely separate.

Note that I'm not particularly fond of target date funds, and I view these rebranded RMD funds as a marketing gimmick. Regardless, one can use these as designed for just a part of one's IRA portfolio.

davidrmoran

Not sure the AO_ family of etfs is quite as diversified, would be an interesting comparison, but AOA, AOK, AOR, AOM are a lot cheaper than the already inexpensive Fido bundles. No glide path, though, just funds of funds, so to speak.

msf

Are we comparing AO funds - apples and oranges? If we're going to compare funds of index funds, let's do that.

		iShare Core Alloc	Fidelity Freedom® Index

Fund of Funds		Yes			Yes
No. of Funds in family	4			13
Structure		ETF			Open end
Underlying funds	7			4-5 (plus MMF)
2 levels of mgmt fees	Yes			No
Net ER			0.25% 			0.15%
Glide path		No			Yes
Foreign bonds (hedged)	Yes			No
Commodities		No			Yes
Inflat. Prot. Bonds	No			Yes (2035 and earlier targets)

bee

@msf, through your link here I thought I'd post the funds glidepath for a retiree:

davidrmoran

Was responding simply to this:

>> investors would place their entire portfolio into a single fund, even one as diversified as ...

Sure, there are differences.

Have always been curious who held or used the AO_ family, and why and for how long. More readily tradable, of course.

bee

Mark said:

Why should or does ones RMD withdrawal rate increase as they get older?

@Mark, my understanding is that RMD rates increase as a retiree ages because the government needs to capture the "tax" from your "tax deferred" investments.

Retirees with large tax deferred balances may see their taxable income (including RMDs) potentially shift them into higher tax brackets as a result of RMDs. This may, in turn, cause up to 85% of SSI to become taxable...even an increase to Medicare premiums may be impacted by higher taxable income.

You don't have to spend the distribution, but you do have to pay the taxes on the distribution.

At 70.5 you are required to withdraw 3.65% of your total tax deferred balance. At age 105 the withdrawal rate is 22.22%.

RMD Chart:


Also,
I'm pretty sure this will be a tax bonanza for the government as baby boomers pay taxes on their RMDs and help fund many underfunded government obligations.
American's (age 70+) held over $500B in tax deferred accounts or about 22% of all tax deferred balances ($2.46 T) as of 2013 so imagine this even higher today.

Article:Here's How Much the Average American Has in an IRA, Sorted by Age:
https://fool.com/retirement/2016/06/27/heres-how-much-the-average-american-has-in-an-ira.aspx

MikeM

Traditional target date funds are designed to be held as one's only investment. The idea is that you're leaving the asset allocation to someone else. If you're throwing other stuff into the mix, then you're messing with that allocation. If that's what you want to do, then why use a target date fund?

Because these retirement date funds are the perfect core 1-fund holding. More so than a balanced fund. More so than all those allocation funds that are talked about here, in my opinion. I think holding a target date fund, which holds the equity/bond mix that suites you, as your core and largest holding and then supplementing it with a few other funds is a great strategy.

msf

What are the differences that concern you? If you were only concerned with their portfolios, why add the remark that the iShares are a lot cheaper? Presented with the fact that the iShares are 67% more expensive than the most similar Fidelity funds, you add that the iShares are "of course" more readily tradeable. It sounds like you're trying not so much to compare these lines of funds as to rationalize buying iShares.

Tradeability encompasses many things. What may make a vehicle "obviously" more tradeable to one trader may make the same vehicle seem less tradeable to a different investor.

Trading iShares even commission-free has an additional cost over trading Fidelity funds - a bid/ask spread. One can mitigate that by placing limit orders, but then the trade may not go through - a risk one doesn't have with the Fidelity Funds.

There's the matter of granularity. One can't buy exactly $3000 of an iShare. One can't buy or sell a buck's worth of an iShare, but once one has established a position in a Fidelity fund, one can do that.

One can trade iShares at any brokerage, but not for any dollar amount of one's choosing. "Readily tradeable" means different things to different people. If one likes keeping things simple and investing in round figures, "of course" the Fidelity fund is going to be more tradeable. If one likes keeping one's investments at a single brokerage, then "of course" buying an iShare is going to seem easier.

davidrmoran

>> It sounds like you're trying ... to rationalize buying iShares.

Oh no, I am found out --- my kickbacks from iShares for touting them here are enormous, it is true.

msf

Is this better: It sounds like you're trying to rationalize someone having bought iShares?

"you can always do what a member of my family does, AOA and AOK 50-50 (or whatever other proportion suits you)"
https://mutualfundobserver.com/discuss/discussion/comment/96283/#Comment_96283

bee

@MikeM,

I think holding a target date fund, which holds the equity/bond mix that suites you, as your core and largest holding and then supplementing it with a few other funds is a great strategy.

For the vast majority of investors: A retirement date fund (until age 65)...done.
At 65, these retirement income funds (Fidelity calls theirs "Simplicity RMD") seem like a viable choice.
Additional considerations:
I would consider a Long Term US Treasury investment and a "Near Cash" investment which would serve to:
1) LT Treausuries do a good job of Hedging against periodic downside equity market (Equity risk...flight to safety)
2) "Near Cash" + LT Treasuries helps mitigate sequence of return risk (selling equities in a down market).
3) "Near Cash" helps manage emergencies (unplanned) or one time expenses (house down payment, weddings, medical expenses, etc.) which can be planned or unplanned.

davidrmoran

Yes, much better.

Wasn't rationalizing, or trying to rationalize, anything, whatever it sounds like to you; just trying to be helpful wrt simplicity, but picking at another is more fun, I agree.

There are many ways to invest simply, and yours are always good ones.

msf

@MikeM - I appreciate the idea of having a core holding and then tweaking. One may want a little more EM, or some foreign bonds, or whatever.

However, when you mix a target date fund with other funds, you may significantly alter your portfolio's allocation. There is no neutral position to focus on, unlike traditional allocation funds, let alone static balanced funds. Assuming you picked the target date fund because you liked its glide path, then you'll have to track it and partition money among your other funds accordingly, so that they don't mess with it.

That is, unless you've got so little in those other funds that they don't significantly affect your overall asset allocation. But then they won't significantly affect your portfolio performance either, so why bother with those funds at all?

bee

@msf, even a well diversified allocation fund (in this case a retirement fund) IMHO still poses risks. My thinking (not @MikeM) is to understand the risks that haven't been properly diversified away or hedged very well by the fund's construction.

For example, many retirement date funds do a poor job of diversifying away equity draw down risk during severe market pull backs. Many other allocation funds are guilty of this as well, including retirement funds. To mitigate this risk, additional non-correlated assets...commodities (including gold), RE, and specific bonds...act as an equity hedge during these serve draw down periods (flight to safety).

Also, sequence of return risk (withdrawing from a single retirement fund) might be another reason to own a "near cash" / "low volatility" fund to serve as "a place to withdraw from", especially when the equity market under performs for extended periods of time.

Further thoughts:
PRPFX was the poster child as an "all weather fund" for a very long time until (commodities & PM) tanked. I'm wondering if it might not be a bad entry point into PRPFX if one believes commodities have bottomed.

Anyway, using Portfolio Visualizer, I combined BTTRX, PRPFX and TRRCX (portfolio three) as an example of adding 2 funds to help smooth out TRRCX. I have to admit that over the long term TRRCX rebounded nicely all by itself (portfolio 2).

Chart:

msf

Unfortunately, every approach has its own risk and costs. It's a matter of deciding what one is comfortable with, both rationally and irrationally. By rational, I mean that if one has a certain preference for some risks over others, one selects an approach that is a good match. For example, if one is willing to risk leaving less or nothing to heirs in exchange for greater certainty of outcome, one may choose a more conservative, lower yielding but less volatile portfolio.

By irrational, I mean choosing what seems to make sense intuitively, even if research shows the opposite. Somewhere I read a paper (no prayer of finding it now) showing that a traditional balanced fund (don't recall if it was Wellington, Wellseley, or something else) gave better survival odds than other approaches. Somehow that doesn't feel right, so I might take a different approach for that reason.

Really wish I could remember what it was I'd read. This would address some concerns about sequence of return risk.

Here's an alternate paper (AAII); a bit sparse, but good for getting another flavor of non-intuitive results. My intuition says that a bucket approach, or at least keeping cash/bonds/stock in different funds should work better than using a hybrid fund (whether balanced, asset allocation, or target date). That's because when the market is down you can draw on your cash cushion (bucket 1). You wait out the bear. But the AAII paper says that a target date fund outperforms various bucket strategies in terms of survival odds.

Comparing a Bucket Strategy and a Systematic Withdrawal Strategy
http://www.aaii.com/journal/article/comparing-a-bucket-strategy-and-a-systematic-withdrawal-strategy

bee

@msf, this article reminded me of your forgetfulness:
Seeking Alpha Article:
long-term-growing-income-open-end-mutual-fund-possible

Also came across this strategy,
Adding Manage futures to a retiree's safe withdrawal plan:
trend-following-managed-futures-safe-withdrawal-rates/

bee

Another possible article using Wellesley and Wellington Funds in retirement:
will-4-percent-withdrawal-rate-last-retirement

bee

Boglehead Article: CAPE and SWR (Safe Withdrawal Rate):
cape-and-safe-withdrawal-rates/

Referenced in the above article (thanks...link works now):
Simple Formulas to Implement Complex Withdrawal Strategies

Helpful Calculator (Excel...Read Only...download and save as a different file name to modify):
davidmblanchett.com/tools

msf

@bee, thanks. The first one seems to be the one that best follows the idea of seeing how different portfolio strategies compare.

With the managed futures link, beware of investment costs. Nearly all papers/simulations are done without considering costs. These days, that's not unreasonable, with index funds costing a handful of basis points. Managed futures are different. The paper cited within that column specifically refers to M*'s managed future funds as a way of implementing. M* puts the average cost of these funds around 2%. If you take 10% of that (the proposal was to allocate 10% of the portfolio to managed futures), you've reduced your returns by 0.2%. Since the simulated advantage of the portfolio (over a 50/50 stock/bond portfolio) was 0.5%, this advantage is roughly cut in half after considering costs. Still worth a look.

I'm still perusing the last couple. (You should correct the last link, it includes an extra http : // at the end). I like the overview in that paper. It mentions some papers that describe a method for adjusting next year's withdrawal based on the probability of success from that point forward.

I'm going to have to spend some time digesting its Withdrawal Efficiency Ratio (WER). The paper asserts that this incorporates both maximizing income and minimizing the odds of running out of money. The term for this is an "objective function". It mathematically encapsulates what is to be optimized. That reduces the problem to a search exercise - find the portfolio strategy that maximizes WER.

It should be apparent that maximizing income and minimizing the odds of running out are in conflict. You don't invest 100% in stocks, because there's a good chance that a bear market could come along and wipe you out in retirement. But if it doesn't, that's how you maximize your income - higher income with greater odds of failure. I'm not sure yet to how WER balances these objectives. My own objective function would be one that maximizes income subject to the constraint that the chance of failure is 0.

davidrmoran

Have you played with ORP?

This gets into the weeds:
https://medium.com/@justusjp/updated-withdrawal-efficiency-rates-8dfc6e0972b8

(may have already been posted, not sure)

bee

@davidrmoran, nice addition. Not only are safe withdrawal rates important, but (the ORP calculator) optimally selects which savings to spend first to maximize tax efficiencies.

From the ORP website:

The Optimal Retirement Income Planner (ORP) uses the facts of your individual situation to compute a tax-efficient savings withdrawal schedule that maximizes your retirement disposable income. ORP uses the same Linear Programming technology that Operations Research practitioners have, for more than 50 years, been using to manage oil refineries, blend chicken feed, schedule air line crews, schedule corn harvesting, timber harvesting, and now, retirement planning.

ORP Calculator:
https://i-orp.com/fees/index.html

davidrmoran

I learned about ORP here, actually, from others; was asking msf if he had played with it, not that it fully parses what he seems interested in.

Yes, the projections and probabilities and especially the tax thing are all nice, albeit the tax advice sometimes dismays. I am tempted to adjust its ratios a bit and maybe use Roth more for cashflow, since (after RMD is met) I am not as confident about future returns as I am about trad IRA taxation.

bee

davidrmoran said:

Yes, the projections and probabilities and especially the tax thing are all nice, albeit the tax advice sometimes dismays.

Especially when it recommends spending down your Roth account early in retirement...seems counter intuitive.
How ORP works :
https://i-orp.com/help/assume.html

golub1

The Simplicity funds and the Target Date funds have the virtue of keeping life simple. Some how that got lost in these discussions.

msf

I haven't played with ORP, so I can't comment on it.

Still looking at the "Simple" Formulas page (for complex withdrawal strategies). "Simple" is definitely in the eye of the beholder. In the sense of easily expressible and computable, the formulas are easy; in the sense of comprehensible, not so much.

It turns out that the Withdrawal Efficiency Ratio incorporates risk tolerance by assuming a particular constant relative risk aversion. (Didn't mean anything to me.)

In learning about that, I found what to me is a great textbook chapter (about 19 pages if printed) on risk aversion. I'd put it at a college sophomore level - about the same as what you'd need for intro Economics - a basic understanding of derivatives (differential calculus) and a bit of common sense.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/risk/riskaversion.htm

Constant relative risk aversion means that the percentage of money you're willing to risk is the same (constant) regardless of how much money you have. A millionaire might risk $100K (10%), but if he becomes a decamillionaire, he'll be just as comfortable risking $1M (10%).

As I wrote above, I'd frame the question of investing for retirement in terms of constraints - specifically that I must not run out of money before I die.

In any case, if one is really patient and really interested in risk aversion, that NYU Stern Business School page is worth skimming. Even if one skips the math, it's interesting to read about why and when the models break down. For example:

Nonlinear preferences: If an individual prefers A to B, B to C, and then C to A, he or she is violating one of the key axioms of standard preference theory (transitivity). In the real world, there is evidence that this type of behavior is not uncommon.

This sort of thinking makes optimizing retirement plans virtually impossible. Welcome to the real world.

bee

golub1 said:

The Simplicity funds and the Target Date funds have the virtue of keeping life simple. Some how that got lost in these discussions.

What I like about these funds is that if the allocation is too conservative or too aggressive an investor could simply choose a different date without worry of recreating an entirely new allocation.

They also have a re-balancing and a (glide path) that most investors don't dedicate enough attention to.

Finally, they're affordable. For a young investor target date funds are a great one stop solution. For an aging investor the Simplicity Funds are certainly worth considering.

Thanks for getting us back on topic.

Now back to my assigned reading from Professor @msf...thanks for the link.

davidrmoran

\\ >> the virtue of keeping life simple.
>>> What I like about these funds is that if the allocation is too conservative or too aggressive an investor could simply choose a different ...
>> Finally, they're affordable.
>> a great one-stop solution.

Auto glide path is great if you can and will stick to it.
Most do not. That is why I mentioned the imperfect / non-optimal AO_ family in the first place. Simple, cheap enough, and best of all instantly understandable for novice investors (I speak from imperfect, flawed, did-not-include-the-whole-world-of-Fidelity-equivalents experience).
If you feel you can manage the glide path yourself, also consider AOK, AOM, AOR, AOA, for sure not overlooking the Fidelity Freedom line.